Monday, May 21, 2012

Free Fallin ... the Indian Rupee exceeds the 55 speed limit!

A couple of weeks into my sabbatical stay in India, I noted in my column that India's rupee was falling against the dollar--it was big time news because the rupee was trading at worse than 54 to the dollar.  A little bit of the Reserve Bank's intervention helped stabilize the situation, but, the slide was certainly coming back if the government's policies weren't changing and India's economic outlook wasn't improving.

Well, it is almost five months since then.  Government policies at the federal and state levels continue to be crazy and chaotic.  India's economic situation isn't improving all that much, despite the fact that the world is not in any recessionary trough.

So, should we be surprised at all with this development?
The rupee, on Monday, plunged below the psychological 55-level to close at an all-time low of 55.03 against the dollar amid robust demand for the U.S. currency from banks and importers
In the bad old days of the government fixing the exchange rate, which was how it was done way back when I left India for graduate school in the US, it was, as I recall, about twelve rupees to a dollar.  Later, when India had no option but to restructure its economic policies in the early 1990s, the rupee's price was determined not by the government but by the market forces, and soon it was into the thirties and then forties, which is where it stayed for a long time.

Now, Indians better start getting used to the fifties.  In fact, buying a dollar for 55 rupees might even sound like a good deal because chances are high that it could get worse:
Analysts said rupee is likely to weaken further due to gloomy macroeconomic data and uncertainties in global economy.

"We expect it to depreciate further in the coming few months. Short-term measures by the RBI may not assist in reversing the trend," said Anis Chakravarty, senior director at Deloitte in India.
It used to be said about Argentina that if ever the government could do the worst thing at the wrong time, well, the leaders made sure they didn't waste that opportunity and, thus, for decades, the country has terribly underperformed.  In the years before WWII, Argentina was thought of as the next and Rostow felt so convinced by the data that he pronounced that the country was ready for one huge but delayed takeoff.  Instead of taking off, it has been a series of North Korean launches, it seems like!

India is not that far behind Argentina in that respect.  In the post-recessionary world, with Europe in one heck of an economic mess of its own, and with the US over-expended, one would have thought that India would have capitalized on the opportunity.  After all, unlike China, which relies way too much on foreign demand while severely restricting internal consumption, India has a robust internal demand for goods and services and can, thus, insure itself against the vagaries of foreign trade.  But, the country is so keen on going the Argentine route. 

The Hindu's editorial notes:
More effective measures should aim to check the trade and current account deficits. Unfortunately, many of the factors contributing to the widening deficits are beyond the control of the government. Oil prices are expected to remain sticky at the current high levels. The import bill is unlikely to come down in the foreseeable future. On the other side, exports have faltered after a heady run during most of last year. The rupee's fall is a symptom of a deeper economic malaise.
Yep, a very deep economic malaise, unfortunately.

All these remind me of a play that we read in high school, called "The Refund."  In that play, two former classmates run into each other and the successful one tells the loser that he became rich by trading in currencies.  The loser cannot understand how one can get rich that way.  To which the successful one replies that the loser ought to go back to their high school and ask for a full refund of the tuition he had paid over the years.  The play then gets to be quite farcical. 

Indians, similarly, ought to figure out how to get their monies back from the crazy politicians at every level whose personal riches have been at the expense of the regular folks who work hard.  For starters, they can get vote all the bums out.  The problem though is this: throwing the bums out will mean new bums will get in!

1 comment:

Rahul Sharma said...

All these Harvard educated politicians and their cronies do not have a clue how to take control of the situation. They have their heads buried in the sand hoping the difficulties will pass over and they can take all the credit when things strart looking up. Well! with inflation out of control, falling rupee, falling GDP, how on earth can they celebrate the 3rd year of UPA. India would have been better off with ordinary people with common sense at the helm, rather than there cronies with brain-washed ideas from the west, tamely speaking in a "Phoreen" accent trying to sound more intelligent than rest.